IPO vs. ICO: similarities, differences, and investment scams

With the boom of bitcoin during the last quarter of 2017 brought about by retail investors and mass media coverage, many other cryptocurrencies flooded the market to ride the digital finance revolution. Many blockchain projects emerged one after another, hoping to complement or compete with Bitcoin in terms of market capitalization and real-world application. How do these blockchain projects raise capital, rollout, and take off? These projects conduct ICO or Initial Coin Offerings. ICOs are much like the IPO or Initial Public Offering in the mainstream financial market. Here are the basics regarding an IPO and an ICO.

What is an IPO?
An IPO is the very first time a company issues stocks or partial ownership of the company to the public. The Initial Public Offering moves a company from being privately-owned to being publicly traded. A company issues stocks for a number of reasons, including raising capital for growth and allowing employees, shareholders, and early investors to make money through trading or dividend payouts.

Typically, the IPO process starts by looking for an underwriting firm, which is usually an investment bank. When an investment firm takes the job, they put up the money to fund the IPO, which essentially means that they are buying the shares before the company is listed on any exchange. The investment firm works directly with the company to determine the type of security, offering price, number of shares, and optimum time to go public. An IPO also involves the process of clearing requirements for the Securities and Exchange Commission in order to verify the accuracy of all financial information. Finally, the investment firm starts selling the shares to the public at an added value, which is how they make money in the process. Afterward, the shares of the company will be traded in the open market, which will determine the fluctuations in price action.

What is an ICO?
An ICO is essentially similar to an IPO in terms of purpose, but different in terms of process. An ICO is when a company raises funds by distributing tokens, instead of shares, to their investors. The tokens have different uses depending on the nature of the blockchain project. Basically, the process starts by outlining and defining the whole blockchain project through a detailed whitepaper. The whitepaper is released to the public to raise awareness and attract investors. The project sets its timeline that includes the pre-selling date and the actual date of the ICO. Typically, when an ICO is finished, the unsold tokens are either burned or re-distributed to investors through airdrops. Once the blockchain project gets listed on an exchange, the tokens from the ICO can then be traded in the market, which will dictate the price action for the token.

The major difference that sets an ICO apart from an IPO is that ICOs are not regulated. This means that a lot of the ICOs that come up could potentially be a scam project. While IPOs are regulated by the SEC to ensure the accuracy and legitimacy of the financials posted by a company, ICOs are unregulated and is vulnerable to scams and fraudulent activities.

If you plan to invest in an ICO, make sure to read the whitepaper thoroughly and verify the authenticity of the blockchain project by doing your own research. Ideally, ICOs are the best way to get in on the entry-level prices of tokens and coins. Legitimate ICOs are great opportunities for profit making.

Satis Group: 81% of ICOs are investment scams
Sadly, however, according to an ICO Advisory firm study, Satis Group, 81% of ICOs were fundamentally scams. Also, according to them, around 6% of ICOs were failures, 5% had already gone dead, and only around 8% went on to trade on exchanges.

Based on their definition of the word “scam”, the 81% of ICOs that were categorized as scam did not have any intention of fulfilling project development through the pooled fund. Despite having complete websites, whitepapers, and promotional campaigns, these ICOs never used the raised capital for legitimate purposes. The failed ICOs are the ones who were not able to get their project off the ground, despite the funding from pre-selling. The 5% that had already gone dead are the ones that are inexistent now.

Avoid ICO Scams
Looking at these numbers, it is important to do a really thorough background research before getting into ICO investments. Examine the whitepapers. Do due diligence. Do not just feel good about the projects. Know their legitimacy. For sure, the project owners are always enthusiastic and their promotions are great. Nevertheless, investors should still check on the project’s viability, feasibility, and potentials for real-world applications.
There are still many legitimate ICOs going around. You just have to know which ones are worth your investment. Invest and trade wisely!